Economic slowdown in Q1
Economic activity in Germany lost noticeable momentum in the Q1 against the backdrop of the conflict in the Middle East. While sentiment indicators in the corporate sector initially improved slightly at the start of the year, and some consumer indicators also picked up, they deteriorated significantly following the outbreak of the Iran war.
Current indicators in industry suggest that the German economy is likely to have grown only very modestly in Q1. New orders in the manufacturing sector recovered somewhat in February after the sharp decline in the previous month; however, the increase was driven primarily by stronger foreign demand, while domestic orders fell again. This was largely due to a further decline in orders from capital goods producers, which are heavily influenced by large-scale defence-related contracts. Industrial production was broadly unchanged in February following a decline in the previous month and, on average over January and February, stood just over one percentage point below the level recorded in Q4 of 2025. Energy-intensive industries were the only area to perform somewhat more favourably, rebounding noticeably in January and February after the downturn at the end of 2025.
Leading indicators for industrial production, such as the Federal Statistical Office’s Truck Toll Mileage Index and VDA data on motor vehicle production, point to broadly weak industrial activity in March. This is likely also due to the effects of the Iran war, including higher energy and raw material prices and supply bottlenecks for intermediate goods. According to surveys by the ifo Institute, around 90% of industrial firms report that they are affected in their business activities by the Iran war. More than one-third of companies report delays in deliveries of intermediate goods and raw materials.
No signs of recovery are visible in domestically oriented sectors either. In construction, gross value added is likely to have declined in Q1 due to adverse weather conditions at the start of the year, which affected both building and civil engineering activity. In the first two months of the year, construction output was more than 2% below the level of Q4 of 2025.
Sentiment in (consumer-related) services has also deteriorated significantly, reflecting sharp increases in energy prices and heightened geopolitical uncertainty. The S&P Services PMI fell in March to its lowest level since September last year, while retail expectations in the ifo business climate survey have recently weakened. In January and February, retail sales, which account for almost one-third of private consumption, were on average around half a percentage point below their level in the final quarter of 2025. Private vehicle registrations were also significantly lower in Q1 than in the previous quarter. The hospitality sector recorded a decline of around 4% in turnover in January 2026 compared with December 2025. Consumer-related services are likely to remain subdued in the coming months, given weakness in the labour market, energy-driven losses in purchasing power, and unresolved geopolitical tensions. Public services in areas such as healthcare, education and public administration are, however, likely to continue providing some stabilisation.
Recent developments in foreign trade provide a bright spot in the economic picture. Following the setback at the beginning of the year, nominal exports of goods and services rose markedly in February and, on average, stood 2.7% above the level of the previous quarter in January and February. Nominal imports also rebounded in February after the earlier decline. However, against the backdrop of global economic headwinds stemming from higher energy and commodity prices, external demand is also expected to lose momentum in the coming months.
Economic developments in Germany will depend largely on the outlook for the Iran war. The announced ceasefire is an important condition for the normalisation of trade and production capacity in the Middle East. However, given the extent of damage to production capacity in the region to date, and the backlog caused by supply bottlenecks in energy and other commodities, this process is likely to take considerable time. As a result, energy and commodity prices are expected to remain elevated. The adverse effects on the German economy are therefore likely to persist in the course of the year, with only a gradual normalisation of energy and commodity prices in the most favourable case.
Global economy remains resilient, but uncertainty stays high
Global industrial production continued to expand in January, rising by 0.5% month-on-month. While output declined in the eurozone, eastern Europe and Latin America, it increased in Japan, China and the United States. Compared with January 2025, global production was up by 3.8%. However, leading indicators have recently deteriorated as a result of the Iran war. The S&P Global World Purchasing Managers’ Index fell again in December, dropping 3.3 points to 51.0, although it remains above the expansion threshold of 50. Sentiment among service providers weakened noticeably, declining from 52.6 to 50.8 points, while the manufacturing sector recorded a smaller decline of 0.5 points to 51.3. According to Sentix, financial investors took a more pessimistic view of the global economy in April, with the index falling from 9.7 to -2.9 points.
Global trade in goods expanded strongly at the start of the year, increasing by 2.0% month-on-month in January after broadly stagnating in December. Trade between Asian economies in particular rose significantly, while activity in the eurozone declined. Overall, global trade in January was 5.2% higher than a year earlier. Container throughput data also point to robust trade in February: the RWI/ISL Container Throughput Index remained at a comparatively high level of 144.8 points. While activity in Chinese ports declined due to the Lunar New Year, throughput in European ports increased significantly as trade with China was brought forward.
In their spring forecasts, economic research institutes and international organisations have recently revised down their expectations for global trade in the coming months. Despite the agreed ceasefire between the United States and Iran, the global economic outlook remains highly uncertain
You can read more information about the economic situation in April 26.
